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The surprising logic behind the use of check cashers and payday loans

June 22, 2017 at 6:20 PM EDT
Often seen as predatory, the check cashing industry has been booming. Lisa Servon wondered why lower-income people who were struggling would cash checks instead of getting a bank account, so she took a job as a cashier to find out. What she learned -- that it’s often cheaper -- is the subject of her new book, "The Unbanking of America." Economics correspondent Paul Solman reports.

HARI SREENIVASAN: Next: You need some cash real quick?

Economics correspondent Paul Solman explores why, for some customers, the best bet might not be the bank.

It’s part of his weekly series Making Sense of financial news.

JOE COLEMAN, President, RiteCheck: And this is East 138th Street, which in many ways is the Wall Street of the Bronx. You have got a lot of financial service providers along the street, bodegas. You have small money remitters.

PAUL SOLMAN: And there’s a pawn shop, not the kind of financier you would find on the actual Wall Street. But, hey, this is the South Bronx, poorest congressional district in America, where some 40 percent of residents live below the poverty line.

JOE COLEMAN: The main service provider on the street is RiteCheck, where we have our financial service center.

PAUL SOLMAN: Joe Coleman is president of this chain of 14 stores in the South Bronx and Harlem. They will cash your checks, pay your bills, transfer money 24 hours a day, 365 days a year. Something like half these customers are unbanked, meaning they have no bank account on purpose.

Jose Benitez is a construction contractor.

JOSE BENITEZ,  (through interpreter): Every time you go to a bank, there’s a problem. You lose time.

PAUL SOLMAN: The bank takes too long to cash checks, he says.

WOMAN: Can you sign there for me, please?

PAUL SOLMAN: And, says cashier Jackie Morel.

JACKIE MOREL: The bank don’t offer all the services that we do. We have prepaid cards. They pay their bills, pay their rent. It’s different things that they can do in one place.

PAUL SOLMAN: But the best alternative is check cashers, payday lenders, pawn shops? Maybe you assume what I did, that they prey on the poor.

Suzanne Martindale is with Consumers Union.

SUZANNE MARTINDALE, Consumers Union: Many of these products really strip away what few assets consumers have. If you’re constantly paying a fee to cash a check, you’re losing money on the deal, compared to if you simply had an account and were depositing checks.

PAUL SOLMAN: Yet check cashing alone nearly doubled to $60 billion from 2000 to 2010. Why, wondered Lisa Servon?

LISA SERVON, University of Pennsylvania: It didn’t make sense to me that people would be using a service like this in increasing numbers if it was so bad for them.

I had done work in low-income neighborhoods for 20 years, and I knew that people who don’t have very much money know where every penny goes. So, that’s when I scratched my head and I realized there’s got to be more to the story.

PAUL SOLMAN: To find out, Servon worked as a cashier at this RiteCheck for four months and then wrote a book, “The Unbanking of America.” She returned to the window when we visited, and was reminded of what she’d learned: People on the edge have no savings, and often need access to every cent they get can their hands on right away.

LISA SERVON: One of the things that we do here is to take money off of people’s EBT cards. That’s electronics benefit transfer, what you get. It’s kind of the equivalent of welfare these days. Right?

And we give you how much you want from that, minus a $2 fee. One day, a woman came in and she wanted — she said had $10 on her card. So, I ran the transaction and I gave her $8. And after she left, I just was scratching my head and thinking, wow, she just paid me 20 percent of what was available to her.

PAUL SOLMAN: Cashier Jackie Morel, who taught Servon the ropes here, explained.

LISA SERVON: Jackie says, well, the ATMs don’t give you $8 or $13 or $28. They give you multiples of $20, maybe $10, if you’re lucky, right? So, suddenly, something that seems illogical makes sense, because you realize that she needed that $8. She needed every dollar that she could get access to, and it was worth it to her to spend $2 in order to get it.

Time and again, working at the window, I was able to really see those things, sometimes ask questions, then really see like, oh, this is logical, actually. I would probably do the same thing if I was in that situation.

PAUL SOLMAN: Joe Coleman goes further. Firms like his, with regulated maximum rates, were actually a reform move by New York state back in 1944, when check cashing was a truly free market.

JOE COLEMAN: It was being done in bars and restaurants. It was the Wild West. They could charge you 20, 30 percent to cash a check.

PAUL SOLMAN: And while the fees may seem high, says Servon, they’re completely transparent, unlike at banks, when you rarely know what you’re paying.

LISA SERVON: The signage that spans the teller windows looks exactly like what you would see at a fast-food restaurant like McDonald’s, and it tells you that it costs 2.03 percent of the face value of your check to cash it, $1.50 to pay a bill, $0.89 for a money order. All of that information is there.

PAUL SOLMAN: Servon also found that, for those with no financial cushion, cashing checks here can be cheaper than at a bank.

LISA SERVON: If they have deposited that check in the bank, it would take three or four days to clear. When they come here, they can use that cash right away. And they won’t be subject to the kind of mistiming at a bank that could lead to an overdraft fee of $35.

PAUL SOLMAN: Enough volume, and even the smallest fees add up. So, RiteCheck caters to folks that big banks aren’t much interested in.

Robert Flexer is a RiteCheck devotee.

ROBERT FLEXER: The people are so beautiful with you. They’re so beautiful and humble and lovable.

PAUL SOLMAN: Jackie Morel has worked behind the counter for 14 years.

How many of the people who come in here do you know personally?

JACKIE MOREL: Eighty-five percent that comes here every week. Everybody know me in the street and everything. They bring me food. They bring me presents for my kids. They bring me everything.


PAUL SOLMAN: OK, maybe there are good reasons to use check cashers, but surely not payday lenders, so common in cash-strapped communities these days.

Servon writes that there are more payday lenders in the U.S. than Starbucks and McDonald’s combined. And she herself did a stint at one.

LISA SERVON: Where I worked in California, they cost $15 per $100 borrowed, which comes out to an APR of 400 percent or 600 percent.

PAUL SOLMAN: That’s APR, annual percentage rate, because it’s 15 percent, $15 on 100.

LISA SERVON: Yes. That’s right. A lot of people end up not being able to pay the loan when it’s due. And this is where the problem comes in. Right? If you can’t pay that $100 loan back in two weeks, you basically end up taking out that loan again and paying another $15 for another two weeks. So, now you’re paying $30 on $100. Right?

And if you roll it over five or six times, you’re paying way more than you borrowed.

PAUL SOLMAN: But look, says Joe Coleman:

JOE COLEMAN: There’s nowhere to go to get a couple hundred dollars. The payday industry has evolved organically to solve a short-term, immediate problem. And I don’t do the product, by the way. In New York — we don’t do payday lending in New York.

PAUL SOLMAN: But you would?

JOE COLEMAN: Yes, I would if I could, because it’s a reasonable product, if you use it responsibly in the way it’s designed.

PAUL SOLMAN: Not surprisingly, Suzanne Martindale of Consumers Union disagrees.

SUZANNE MARTINDALE: The evidence has been clear and damning for many, many years that the vast majority of people that start to take out payday loans end up in a cycle of debt.

PAUL SOLMAN: Eighty percent of payday loans are re-borrowed within 14 days, and almost 90 percent are re-borrowed within 60 days.

In fact, Servon says:

LISA SERVON: What’s interesting is that even my boss at the payday lender said, payday is a lousy product, but we’re filling a need that nobody else will fill.

PAUL SOLMAN: But aren’t the payday lenders taking advantage of these people?

LISA SERVON: It’s a very hard question to answer, the question really being, are payday loans helpful or harmful, or, alternatively, is very expensive credit better than no credit at all?

And I would say that the jury is still out on that question. We talk about getting rid of the lenders without recognizing that the demand is still there. And the demand is still there because we have had declining wages since the ’70s,. Income volatility has doubled over the past 30 years, so people have much less ability to predict how much money is coming into their household from week to week.

PAUL SOLMAN: And the less predictable the income, says Joe Coleman, the greater the need for check cashing, for payday lending even.

JOE COLEMAN: Voltaire said of the supreme being that, if he didn’t exist, we’d have to invent him. And the same can be said for our industry. If we didn’t exist, you would have to invent us. People need the service.

PAUL SOLMAN: For the PBS NewsHour, this is economics correspondent Paul Solman reporting from the South Bronx.